THE PRIVATE FIRM

The private corporate enterprise is such an intrinsic part of the modern capitalist economy that few realize its relative youth. The antecedents of the corporation can be traced back to the medieval merchant guild systems or, more recently, to trading companies enjoying monopolies granted under royal charter, such as the British East India Company. However, the advent of the truly modern firm is tied to the development of general incorporation laws, under which any entity meeting statutorily defined criteria was able to incorporate, rather than requiring the special grants of privilege that had hitherto prevailed. In the United States, the first of these laws was passed in 1811 by New York State (Vagts, 1973). The pattern subsequently established in Western economies--a complex network of independent firms, frequently competing on the basis of technological and scientific creativity, with successful innovation rewarded int eh marketplace--became the basis for modern, materially successful economies (Rosenberg and Birdzell, 1990). Thus, the modern corporation appeared at a certain stage in the increasing complexity of economies arising from the Industrial Revolution, and, arguably, was then responsible for their continued evolution.

The fundamental purpose of a for-profit corporation in a free market economy is to make money for its owners, that is, the shareholders. This point is made vigorously by Milton Friedman (1962): ''Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible. This is a fundamentally subversive doctrine." It is, of course, now generally recognized that firms to a greater or lesser extent reflect the interests of many stakeholders, including their employees, their managers, their customers and, increasingly, different governments in a global economy. Corporate charitable contributions, for example, are generally legal if they are reasonable, and the firm's directors have broad discretion to take such actions if they help protect the corporation's interests. Firms from cultures less individualistic and adversarial than that of the United States, such as those in Europe or, especially, in Japan, tend to display a somewhat greater propensity to internalize select public interest.

Inability to optimize one goal (or wisdom in a complex and rapidly changing environment) may lead firms to try to satisfice (meet minimum levels of performance) several goals, rather than focus on one (Scherer, 1980). Additionally firms, like any agent, evolve in structure to reflect changing boundary conditions, such as, for example, shifting from a authoritarian management model and hierarchical structure appropriate to mass-production manufacturing to a flatter, specialist-based, information-rich organization reflecting changes in technology and global market conditions (Dertouzos et al., 1989; Drucker, 1988). Nonetheless, it remains true that, broadly speaking, seeking profits remains the primary

Bookmark this page

Important Notice

As of 2013, the National Science Education Standards have been replaced by the Next Generation Science Standards (NGSS), available as a print book, free PDF download, and online with our OpenBook platform.